Kiddie Tax Simplification
Another benefit of the new tax law which is in effect for 2018, is a change in the so called ‘kiddie tax’ which served to simplify the rule to some degree. Prior to the 2017 tax law change a dependent child under the age of 19 who provides less than 50% of their own support, or a full-time student under the age of 24, would divide their income into two buckets: earned and unearned (investment) income. If parents claimed the child as a dependent on their return, the child’s standard deduction would be the greater of $1,050 or the child’s earned income plus $350 up to the standard deduction amount of the parents. If the unearned income was more than $2,100, the investment income would be taxed at the tax rate of the highest-income parent. What is complex about that?
With the new 2017 tax act, each child’s tax is calculated using the trust tax rates rather than the parents’ tax rates. Unlike individuals, trust have just four brackets for ordinary income: 10% (up to $2,550), 24% ($2,551-$9,150), 35% ($9,151-$12,500) and 37%, with the top rate applied to all income over $12,500. For long-term capital gains, different rates apply. Unfortunately children get to the highest tax rate with far less income than adults – married individuals have a top rate that kicks in above $600,000 in taxable income, but at least the calculation is simpler.
If you have questions about how the new tax law might impact your financial plan please give us a ring.